Foreign
Investment
FPI FIIs
Offshore
funds
ADRs/GDRs
FDI

 FDI occurs when a firm invests directly in facilities to produce and/or market a
product in a foreign country.
 Foreign direct investment (FDI) is defined as an investment involving a long-term
relationship and reflecting a lasting interest and control by a resident entity in
one economy (foreign direct investor or parent enterprise) in an enterprise
resident in an economy other than that of the foreign direct investor (FDI
enterprise or affiliate enterprise or foreign affiliate).
 It generally takes the form of acquiring a stake in an existing enterprise in the
foreign country or starting a subsidiary to expand the operations of an existing
enterprise.
 FDI implies that the investor exerts a significant degree of influence on the
management of the enterprise resident in the other economy.

 FPI involves investment in foreign financial assets like stocks, bonds, commodities
etc.
 This type of investment is not made with the intention of acquiring a controlling
interest in the issuing company.
 Typically, this type of investment is short term in nature and is made to take
advantage of favorable changes in exchange rates or to earn short term profits on
interest rate differences.
 It provides the investor with an opportunity to diversify their portfolios and better
manage the associated risk.


Basis FDI FPI
Motive Made for the purpose of
productive capacity
Motivated by profit
Participation in management Intention of managerial
control
No say in the management
Assets Physical Financial
Duration Long-term Short-term
Stability More stable Less stable (volatile)
Impact on Growth Critical driver of economic
growth
Give impetus to financial
markets
Entry and exit Difficult Easy

Basis Of
Classification
By Direction
By
Target/Asset-
based view
By Nature of
Business
Activity
By Motive

 On the basis of direction of flow of funds, FDI can be classified into two types.
 INWARD FDI: Inward FDI takes place when foreign capital is invested in local
resources.
 OUTWARD FDI: Outward FDI takes place when local capital is invested in
foreign resources.

• Establishment of wholly new operational facilities from
scratch in the host country.
• Long term
Greenfield
Investment
• Two or more independent business entities which are
resident in different countries combine their assets and
operations to form a new and separate legal entity.
Mergers
• Purchase of an existing venture
• Can be hostile or friendly
Acquisitions
• Combination of greenfield and M&As
• Infusion of fresh capital and assets after acquisition
Brownfield
investment

 HORIZONTAL FDI: Investment in the same operation or industry
 VERTICAL FDI: Investment in the upstream or downstream
operations
 Backward Vertical FDI
 Forward Vertical FDI
 Conglomerate FDI: Investment in unrelated Industry

•To take advantage of natural resources
•Likely to promote exports in the host economy
Resource- Seeking
•To directly serve that market with local production and distribution rather than
through exporting.
•Gain access to large overseas market and to reap the benefits of economies of scale
Market-seeking
•To produce cost-effective and competitive global production networks
•Gains from Synergies
Efficiency-seeking
•To acquire strategic assets like innovative technology; management expertise etc. in
order to strengthen firm’s global competitiveness
Strategic asset-
seeking

Resource transfer effects
Employment effects
BOP effects
Effect on competition and Growth
Revenue to Government
Less volatility

Adverse effects on Competition
Adverse effects on BOP
National sovereignty and autonomy
Capital intensive technology

BOP benefits
Employment effects
Acquisition of skills

BOP effects in three ways:
Capital A/C- Initial capital outflow
Current A/C- More Imports
Current A/C- Less Exports
Employment Effects